Sunday, December 5, 2010

The markets play a new game as employment disappoints

Markets did not react as expected to the disappointing jobs report.

Markets acted as though jobs rose and unemployment fell or stayed steady. This tells us that the paradigm of a recovering economy is still locked into the market’s pricing mechanisms. Traders were not able to stampede buyers into the treasury market on a weak jobs report. The pessimists have been routed.

Even though the Fed is expected to continue its QE - especially with this report showing that the economy is still not building that long-expected head-of-steam- NO ONE seems to want to bet on lower rates even with the Fed program fully in gear.

Pretty interesting stuff, eh?

We know that the jobs report has some volatility but this week’s backtrack is really out of the blue. The ADP has been improving, jobless claims have notched down, the quit rate (a reverse indicator) has ticked up. The ISM employment gauges were good –especially for the non-MFG ISM which (fortunately) was released after the employment report or there may have been a more violent negative reaction to the actual release. The non-MFG ISM employment barometer rose to a reading of 52.7 to the 74th percentile of its rate since 1998, a very respectable position. In contrast non-MFG private sector jobs are only in their 63rd percentile over that period. The non-MFG ISM is much stronger than the jobs series it purports to track. Moreover, it was the strongest non-MFG ISM reading for jobs in this expansion –the strongest reading in 37 months, while the non-MFG job gain was the seventh strongest in 37months..

We have other instances of indicators being different from their true-data counterparts. Of course we care the most about the true-data, in this case, the jobs report and the unemployment rate, not the ISMs. But the ISMs are not alone in showing strength. Auto sales have picked up. Other consumer spending has picked up. Jobless claims, another true-data report, has been carving out new lows. Announced corporate lays offs are very low. Yet everything in the November jobs report was disappointing. Was it a massively bad seasonal adjustment problem, or were the strong reports (smaller firms) simply the late reporters and will there be a substantial upward revision next month?

In some sense it is the monthly employment report that is isolated. And we know that seasonal adjustment factors play a big role in this report. We also know the earlier months were on balance revised UP making the month’s weakness even harder to fathom at a time that most indicators other than those for housing are improving.

One additional report that improved and did not get the headlines it deserves is the NFIB employment survey. This is important since so many jobs are in small businesses. So will the monthly jobs report get revised up? We’ll see.

1 comment:


The only real solution to the underemployment problem is to create enough jobs that pay good wages but match the skill set of the job seekers.